Oil breaks through $120 as Gustav strengthens

Oil prices shot higher for the fourth straight day, breaking through $120 per barrel as Tropical Storm Gustav headed for the Gulf of Mexico and strengthened as it bore down on the vast U.S. energy infrastructure along the coast.

Maximus sustained winds increased to near 70 mph and the National Weather Service expects the storm to become a full-fledged hurricane later in the day.

The exodus from the Gulf by oil workers accelerated.

Royal Dutch Shell PLC has evacuated nearly 400 people and said it will bring in another 270 Thursday.

The company said production will be impacted. BP PLC was also removing personnel from the region that's home to about a quarter of U.S. crude production and much of its natural gas.

Transocean, the world's biggest offshore drilling contractor, is suspending operations at all of its rigs and pulling nearly 1,600 people out of the Gulf.

Though it was too soon to know where the storm would hit, atmospheric models showed Gustav heading toward Louisiana and areas devastated by Hurricanes Katrina three years ago Friday.

One weather research firm predicted as much as 80 percent of the Gulf's oil and gas production could be shut down as a precaution if Gustav enters the region as a major storm.

By afternoon in Europe, light, sweet crude for October delivery rose $1.86 at $120.01 a barrel on the New York Mercantile Exchange.

On Wednesday, the contract rose $1.88 overnight to settle at $118.15 a barrel.

In London, October Brent crude rose $1.15 to $117.37 a barrel on the ICE Futures exchange.

Analysts said trading was thinner than usual ahead of the long weekend in the United States celebrating Labor Day.

"Oil markets are waiting for Gustav and ... waiting to go on holiday," said Olivier Jakob of Petromatrix in Switzerland.

In the U.S., Louisiana Gov. Bobby Jindal declared a state of emergency and activated the National Guard in advance of storm Gustav. Jindal said Wednesday 3,000 National Guard troops would be activated and deployed a day in advance of the storm's expected landfall. An additional 2,000 troops could be called up to duty.

Gustav formed Monday and roared ashore Haiti Tuesday as a Category 1 hurricane. The storm triggered flooding and landslides that killed 23 people in the Caribbean. It weakened into a tropical storm, though it is likely to grow stronger in the coming days by drawing energy from warm open water.

The tropical storm was centered about 80 miles east-northeast of Kingston, Jamaica, and moving toward the west-southwest near 8 mph.

Forecasters said Gustav might slip between Mexico's Yucatan Peninsula and the western tip of Cuba on Sunday, then march toward a Tuesday collision with the U.S. Gulf Coast  anywhere from south Texas to the Florida panhandle.

"We know it's going to head into the Gulf. After that, we're not sure," said meteorologist Rebecca Waddington at the National Hurricane Center. "For that reason, everyone in the Gulf needs to be monitoring the storm."

Gustav is the first storm of the 2008 Atlantic hurricane season to pose a serious threat to the more than 4,000 oil and gas installations in the Gulf. In 2005, Katrina and Rita destroyed 109 oil platforms and five drilling rigs.

Oil prices were also supported by a weaker dollar, which boosted the demand for oil among investors who buy commodities as a hedge against inflation. The euro gained to $1.4767 while the dollar fell to 109.39 yen.